Update on WTO Doha round negotiations
by Jack Wilkinson, President of IFAP
Lima, Peru, 27 September 2007 - Meeting of the IFAP Latin America and the Carribean Committee
PROSPECTS FOR A WTO AGREEMENT
The Doha Round of WTO trade negotiations were launched on 14 November 2001, almost six years ago. These negotiations are not easy. They involve 150 countries and cover almost everything that moves in world trade, and there is a lot at stake for farmers. However, the previous round took 7½ years to negotiate - September 1986-April 1994 – and I guess that this Round with need at least as much time.
That it not the way the WTO sees it. They want to wrap up the negotiations by the end of the year. Ambassador Falconer, who is Chairman of the Agricultural Negotiations Committee, brought out a “Revised draft modalities” paper for agriculture on 17th July as the basis for a deal on agriculture.
It was a risk he had to take if WTO is to have any chance of concluding by year end. However, the text is far from being agreed. Negotiations restarted on 3rd September. Ambassador Falconer has given himself until the end of the month to discuss his paper intensively with a core group of 36 delegations representing a broad range of the different interests in these talks. Then he intends to prepare a revised draft text for mid-October. If this text meets with general agreement, they will then think about moving to Ministerial level meetings.
Well that is the plan. I think that they are being optimistic thing that they can finish this year, but as producers we have to stay vigilant and engaged throughout this process, whenever it may conclude.
So what is Ambassador Falconer saying on modalities? There is nothing really new on the table in terms of substance. What is new is that the Ambassador feels that he has found the centre of gravity on most of the negotiating items in agriculture.
There are three pillars in the negotiations on agriculture - domestic support, market access, and export competition.
DOMESTIC SUPPORT
In the area of reducing domestic support, there would be four separate commitments by governments. These are: an overall cut in trade-distorting support, cuts in the ‘amber box’, cuts in the ‘blue box’, and cuts in the ‘de minimis’.
For cuts in overall trade distorting support, countries would be grouped into three categories depending on how much trade-distorting support they provide. The EU is in the first group because it gives most support (over $60 billion/year), followed by Japan and the USA in the second group because they give the next highest overall level of trade-distorting support (between $10-60 billion/year) and then there is a third group for other countries which also give some trade-distorting domestic support ($10 billion/year or less). The largest subsidizers would have to make the biggest cuts in trade-distorting expenditure.
The EU has reformed the Common Agricultural Policy to change trade-distorting support into direct payments and other forms of non-trade distorting support and so could probably agree to a 75 percent cut (1). It is insisting that there be no more than a 10 percent gap in the reduction commitment with the next group, so the cut for Japan and the USA could be 66 percent. Japan has also reformed its domestic farm policy and could manage the 66 percent cut in its spending entitlement on trade-distorting support. The USA, however, is intending to keep its Farm Bill largely unchanged (2). The G-20 notes that the USA used $10.8 million of amber box spending last year and called for them to accept $12 million as a ceiling. The USA replied that it spent on average $15.8 million per year over the last five years and could not go below $17 billion in its overall spending entitlements. Other countries are pressing the USA to go reduce more, so that there could be a compromise maybe around a spending limit of $15 billion, which would represent a cut of 66 percent. However, this is proving to be a tough call. For the third group of countries, the overall cut would be of the order of 50 percent, with the developing countries making a cut of two-thirds of this amount. The proposed base period for reductions is 1995-2000.
This overall cut is to be made up of reductions in three elements: the amber box, blue box and ‘de minimis’ spending.
The ‘amber box’ contains most of the trade-distorting subsidies. These are measured by the AMS (Aggregate Measure of Support). Reduction modalities would be similar to those for overall support, i.e. the establishment of three groups, with larger percentage reductions in support for the countries that spend the most on trade-distorting support. Thus the EU is in the first AMS Group (spending over $40 billion/year) and would cut spending by 70 percent; the USA and Japan are in the second AMS Group (spending $15-60 billion/year) and would cut spending by 60 percent; other countries are in the third group (spending $15 billion or less) and would cut spending by 45 percent. The 17 developing countries that are giving some trade-distorting support would have to bear two-thirds of the cuts of developed countries.
There will be product-specific caps (limits) on spending in the amber box. It is proposed that these caps be equivalent to the average level of AMS spending per product over the period 1995-2000 (there would be some adjustment for the particular situation of the USA). The caps would be progressively applied over the 5-year implementation period.
The ‘blue box’, contains support payments that are less trade distorting than amber box payments. These include: direct payments under production-limiting programs (quota schemes) and direct payments not linked to production. The proposal is that blue box payments for developed countries should be capped at 2.5 percent of the value of agricultural production as of the first day of the implementation period. For developing countries the blue box would be capped at 5 percent.
Ambassador Falconer is also proposing product-specific caps for blue box payments based on the 1995-2000 average payments, as for the amber box. He would also limit the value of support that can be paid to any one product as a proportion of the total in order to prevent blue box spending being concentrated on only a few products.
The third element of the negotiations on domestic support is the ‘de minimis’ level. Currently this is 5 percent for developed countries and 10 percent for developing countries. These percentages are the shares of domestic production that can be subsidised without falling under WTO disciplines. The Doha negotiations would cut the ‘de minimis’ by at least 50 percent for developed countries to a maximum of 2.5 percent. Developing countries would have two-thirds of this cut applied to their 10 percent ‘de minimis’, but certain countries would be exempt.
There is of course also a ‘green box’, but the main changes proposed here are additions for developing countries, e.g. to include payments for land reform or for the acquisition of food security stocks. Most farm support has already been converted into non-trade distorting support e.g. direct farm payments, and so falls under the ‘green box’ which is exempt from reduction commitments.
MARKET ACCESS
Negotiators are working on the basis of a 4-tier formula system for cutting agricultural tariffs, and so increase market access. The highest tariffs would go in the top tier (or band) and the next highest in the second tier, and so on. The highest tariffs would be cut the most over the 5-year implementation period. The four tiers would be as follows:
- Tariffs of 20% or less would be cut by 48-52 percent (actual % to be agreed)
- Tariffs from 20-50% would be cut by 55-60 percent
- Tariffs from 50-75% would be cut by 62-65 percent
- Tariffs over 75 % would be cut by 66-73 percent.
For developing countries the tiers are different (3), but the cut for each tier would be two-thirds of that agreed for the developed countries in their tiers. No developing country would have to cut tariffs by more than 36-40 percent.
The decision on the reduction level in the highest tier is critical to establishing the reductions in the other bands and to the calculation of the deviation for sensitive products.
In the market access negotiation, it is the European Union that is most under pressure. The EU says that it cannot accept more than a 70 per cent cut in tariffs in the highest tier. The others think that they can push the EU above this, which is proving difficult. Technically, of course it is possible to just find the averages of the proposals and come up with a number, but that is very different however from proposing a vision of how world trade should contribute to promoting global economic development.
The overall ‘average reduction’ in agricultural tariffs that the formula should deliver has yet to be agreed: the G-20 said that the average cut should be 54 per cent; the EU said 39 percent and everybody else wanted bigger cuts. The EU has now come up to 52 per cent. So you can see that between 52-54 percent you are nearly at a deal on the average tariff cut.
The developing countries would make two-thirds of the effort of the developed countries all through this Round. The ‘least-developed countries’ would not have to make any reduction commitments at all in these negotiations.
The proposed tariff cuts may sound like a lot, but what are being cut are the ‘bound’ or agreed maximum tariff entitlements in the WTO. Very few countries use their maximum entitlements.
If you look at the bound tariffs on agriculture of the developed countries, the average entitlement is 27 percent, but they are actually using 14 percent. Thus in many cases, the proposed cuts in bound tariffs would not have a big effect on actual applied tariff rates. In developing countries, the average bound tariff in agriculture is 48 percent, but they are using only 21 percent. The average bound agricultural tariff for the world is 37 percent compared with an applied rate of 17 percent.
Concerning ‘sensitive products’ – these tend to be the products that governments want to protect. Each country can make a list of products that if judges to be sensitive for its national agriculture. The proposal for dealing with sensitive products is to negotiate an allowed deviation from the regular cuts. There would be a minimum deviation of one-third and a maximum deviation of two-thirds for all countries. Some people do not want tariffs for sensitive cut at all, precisely because they are sensitive products. But this Round is about liberalization and all tariffs are on the table for reduction. Designation of sensitive products would be limited to 4-6 percent of all tariff lines. However, this would be increased to 6-8 percent for countries which have more than 30 percent of their tariffs in the top tier of the formula.
Developing countries would be allowed to designate one-third more tariff lines as ‘sensitive products’ than developed countries, and in addition they would be would be able to self designate an additional number of tariff lines as ‘special products’ for reduced tariff cuts. ‘Special products’ are those that are “essential for the food security, livelihood security or rural development needs” of a particular developing country. There would also be a ‘special safeguard mechanism’ introduced for the use of developing countries to counter import volume surges or sudden drops in the price of imports. There was some discussion as to what ‘special’ means – some developing countries think that ‘special’ means that it is special for them; other countries think that it means you can only use it on special occasions i.e. to be used for short periods only, say up to 12 months. Another consideration for developing countries on market access is ‘erosion of preferences’, which is especially important for ACP (4) countries that have enjoyed preferential trade relations with the EU. The main commodities concerned are sugar and bananas, since they account for 85 percent of ACP preferences. For sugar, trade relations with the ACPs are determined by the pace of the reform of the EU sugar regime. For tropical products like bananas, one proposal is for importing countries to eliminate all tariffs on tropical products that are currently under 25 percent, and to cut tariffs that are over 25 percent by 85 percent. However, negotiators are having trouble agreeing on a list of what are tropical products. For example, the Cairns Group thinks that sugar should be on the list, but the EU does not agree. Least-developed countries would be awarded duty-free and quota-free access for 97 percent of all their agricultural exports immediately at the start of the implementation period in the markets of the developed countries and in those developing countries “declaring themselves in a position to do so”.
Then there is the question of the ‘tariff quotas’, which are usually on sensitive products. Under Ambassador Falconer’s proposals, when a country is allowed to apply lower cuts in tariff on sensitive products, it has to compensate by increasing the size of its tariff quota on that product (5). The advantage for importing countries is that tariff quotas provide ‘clean access’ so they know what can come in, and after that there is a dissuasive over-quota tariff. Talks are moving to the idea that tariff quotas should be expanded to 5 percent of domestic consumption if a two-thirds deviation is applied for tariff cuts and expanded to 4 percent of domestic consumption if a one-third deviation is applied. However, there would be provisions for certain special cases.
It is interesting that the market access proposals also provide for the negotiation of intergovernmental commodity agreements to stabilize export prices. These agreements may provide for the participation of producer associations.
EXPORT COMPETITION
The main thing here is the ‘export subsidy’ negotiations. There is already an agreement to phase out all export subsidies over a period of 5 years (by end 2013). Over half this cut would take place in first two years (by end 2010). Export subsidies on cotton would be eliminated immediately at the start of the implementation period by developed countries.
The other forms of export support that are to be disciplined are: export credits, the actions of State-trading enterprises, and the delivery of food aid.
On export credits (6), a new WTO Agreement on Agriculture would ban any export credits whose repayment period was longer than 180 days (there would be some exceptions). Rules are still being negotiated on the conditions for the use of export credits for less than 180 days, but these would have to be based on commercial rates.
On State-trading enterprises (STEs), there is a large consensus to allow the existence of agricultural exporting State-trading enterprises but to discipline their behaviour, so that they do not provide any export support for the commodities they trade. In other words, they would phase out any export subsidies they give, they would not be allowed to underwrite losses, and they would not be allowed to give preferential access to capital (financing or refinancing).
On food aid, there would be a ‘safe box’ for food aid used for emergency purposes. Emergencies are defined situations that result in an appeal by the UN World Food Program, recognized agencies like the Red Cross, etc. All food aid would have to be given in grant form – it must be a gift. Concessional sales would not be allowed, nor would commercial re-export of food aid by the recipient country. The only issue here is whether food aid should be in cash or product form. The USA uses products for food aid and is not going to change its mind. However, the new Agreement will likely urge donor countries to move towards giving money so that developing countries can buy the food aid they need.
These then are the main lines. Farmers’ organisations want space for domestic policies so that their country can run domestic farm programs. The way the negotiations are going, that space could be very tight. Most developing countries are seeking more flexibility in the trade rules in order to be able to develop their domestic agricultures in the face of stiff global competition; this is a “development round” so negotiators will have to deliver on this.
ALTERNATIVES TO WTO
Final a word about ‘alternatives” if we do not get a WTO agreement. Alternatives include either signing bilateral trade agreements, or making rules through panel decisions under the dispute settlement system of WTO based on the existing Agreement.
Concerning ‘bilateral agreements’, there are three reasons why they are not as good as a multilateral agreement in WTO. The first reason is that bilaterals only cover one of the three pillars of the WTO negotiations, namely market access: they do not deal with domestic support or export competition issues. This is because bilateral agreements are often made between a developed and a developing country and developing countries usually have no subsidies to trade off against those of a developed country.
The second reason is the unbalanced power structure of bilateral negotiations. For example, the proposed US bilateral agreement with Peru states that Peru must fight the illegal logging and wildlife trade, accept ILO labour standards, sign up to the different international environmental conventions, and protect intellectual property rights. This ‘conditionality’ does not happen in the WTO.
The third problem with bilaterals is what is known as ‘spaghetti soup’. If every country signs a bilateral agreement with everyone else, not all of which include the same arrangements, then trade becomes very complex. The multilateral process in WTO is far cleaner and fairer for everyone.
However, if the WTO negotiations are going nowhere, there will inevitably be an increase in bilateral agreements as countries wish to strengthen trade relations with each other. There will also be an increase in panel disputes under the WTO dispute settlement mechanism by challenging the actions of certain countries. Thus negotiation will be replaced by litigation.
In conclusion Mr. Chairman, the WTO Doha Round is still with us, even though it is not making spectacular progress. Discussions continue, and when negotiators are ready they will make a deal. As farmer leaders we must be ready so that our agricultures can benefit from the new WTO agreement and not become a victim of it.
Thank you.
(1) A 75% cut in EU trade-distorting support would bring its spending entitlement down to 27.5 billion Euros/year.
(2) There will however be some reorientation of spending priorities under the 2008 Farm Bill in the USA towards nutrition, conservation and rural development.
(3) Tiers for tariff reductions for developing countries would be: 30% or less; 30-80%; 80-130%; over 130%
(4) ACP – Africa, Caribbean and Pacific developing countries with historic ties with the EU countries.
(5) Expanion of tariff quotas for sensitive products would be on a MFN basis only, i.e. open to all WTO members, and not on a preferential basis
(6) Export credits also include export credit guarantees and insurance programs